Has US add-on activity peaked?

Last year, US private equity investors added on to extant holdings so frequently that the proportion of add-ons to all buyouts hit 64%. The steady increase over the past six years and the rapid surge of 3% between 2015 and 2016, even as overall activity fell, speak to the increasing maturation of adding on as a PE investment strategy and its relative attraction in the current environment.

US add-on % of buyout activity

It's been clearly established that add-ons simply make more sense nowadays because of high prices, strategic competition and increased caution. But given their prevalence, as well as the normalizing level of PE activity in the US, have they reached a peak proportion of US buyout activity?

Continued declines in buyout volume due to sustained strategic competition and high prices could contribute to the elevated percentage of add-ons, but we estimate that sector-specific factors would really drive their proportions even higher or contribute to a downtick. Between 2015 and 2016, the absolute count of add-ons in most sectors declined substantially, in tandem with overall buyout activity. But healthcare and IT add-ons stayed resilient or even increased slightly in frequency, testifying to sector-specific trends rendering platform building relatively more attractive.

Should buyouts slide further in volume, with all other current factors holding constant and tech and healthcare retaining their attraction, it's likely that add-on proportions could rise even further. That being said, buyout activity is unlikely to decline at a similar rate but instead normalize in 2017 at the recently observed subdued levels. It’s most probable that add-on proportions have peaked and will only plateau going forward.